Otis Navigates Mixed Q1: Service Strength vs. Equipment Headwinds in a Shifting Landscape

The first quarter of 2025 brought a mixed performance for Otis Worldwide, with its Service segment emerging as a pillar of resilience amid a weaker New Equipment division and macroeconomic headwinds. While net sales fell 3% year-on-year to $3.3 billion, the company’s focus on recurring service revenue and margin discipline underscored its long-term strategic priorities. For investors, the results reveal both challenges and opportunities, particularly as Otis bets on its backlog of modernization projects to drive future growth.

Financial Performance: Adjusted Strength Amid GAAP Weakness
Otis’s Q1 earnings highlighted a divergence between its GAAP and adjusted metrics. GAAP EPS plummeted 29% to $0.61, weighed down by restructuring costs and currency impacts. In contrast, adjusted EPS rose 5% to $0.92, reflecting operational improvements in its core service business. A similar pattern emerged in operating margins: GAAP margins contracted by 350 basis points to 12.3%, while adjusted margins expanded 40 basis points to 16.7%. This underscores the importance of non-GAAP metrics to investors tracking Otis’s core performance.

The Service Engine: Steady Growth Amid Volatility
The Service segment, which now accounts for 67% of Otis’s revenue, grew 1% in net sales to $2.2 billion, with organic sales rising 4%. Operating profit surged $14 million to $537 million, driven by volume gains, pricing power, and productivity improvements. Management emphasized the segment’s mid-single-digit organic sales growth and margin expansion, which align with its long-term targets. With modernization orders up 12% globally, Otis is positioning itself to capitalize on the $100 billion-a-year elevator modernization market. Projects like the Patna Metro in India and Burj Khalifa modernization highlight its execution in high-profile markets.

New Equipment: A China-Driven Downturn
The New Equipment segment, however, faced significant headwinds. Sales fell 9% to $1.2 billion, with China’s sales dropping 22% year-on-year. Weakness in Asia-Pacific, particularly in residential construction, overshadowed gains in North America and Europe. While Otis expects New Equipment sales to decline 1-4% organically in 2025, management remains optimistic about recovery in late 2025 and 2026, citing improving order backlogs. Orders for modernization and new equipment rose 12% in Q1, contributing to a backlog growth of “mid-teens,” which Otis views as a key lever for future sales.

Strategic Moves: Dividends, Buybacks, and Geographic Expansion
Despite the New Equipment slump, Otis reinforced its commitment to shareholder returns. It repurchased $250 million in shares and increased its dividend by 8% to $0.42 per share, marking five consecutive years of dividend growth. These actions signal confidence in the company’s cash flow, which remains robust due to its recurring service revenue model. Additionally, Otis’s strategic moves—such as acquiring urban elevator locations in the U.S., expanding manufacturing in India, and securing contracts in Taiwan—highlight its focus on high-growth regions and modernization opportunities.

Outlook: Balancing Near-Term Challenges with Long-Term Momentum
For 2025, Otis projects net sales growth of 3-4%, driven by service sales expanding 5-7% organically. Adjusted operating profit is expected to reach $2.4–$2.5 billion, with adjusted EPS targeting $4.00–$4.10. Management’s confidence stems from its $14.8 billion backlog, which includes $5.6 billion in service-related projects. While New Equipment remains a near-term drag, the company’s modernization pipeline and geographic diversification—80% of service revenue now comes from outside the U.S.—suggest resilience against regional downturns.

Conclusion: A Company Betting on Its Strengths
Otis’s Q1 results reflect a company navigating a challenging environment by leaning into its core competencies. The Service segment’s 4% organic growth and margin expansion, paired with a robust backlog, position Otis to outperform peers in the cyclical construction sector. While New Equipment struggles highlight vulnerability to China’s slowdown, the company’s dividend discipline, share repurchases, and geographic diversification mitigate risks. Investors should focus on the long-term: Otis’s modernization backlog and its 5-7% service growth targets suggest that, over time, its strategy will outweigh short-term headwinds.

With shares trading at 13.5x 2025E adjusted EPS—below its five-year average of 14.8x—Otis offers a compelling entry point for investors willing to bet on its service-driven model. The company’s ability to convert its backlog into cash flows and stabilize New Equipment sales in 2026 will be critical, but for now, the fundamentals remain intact.